The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and the related notes in the IPO Prospectus. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and in the IPO Prospectus, particularly in the sections entitled "Risk Factors" and "Forward-Looking Statements". The following discussion provides commentary on the financial results derived from our unaudited financial statements for the three and nine months endedSeptember 30, 2021 and 2020 prepared in accordance withU.S. GAAP. In addition, we regularly review the following Non-GAAP measures when assessing performance: Organic Revenue Growth Rate, Adjusted Compensation and Benefits Expense, Adjusted Compensation and Benefits Expense Ratio, Adjusted General and Administrative Expense, Adjusted General and Administrative Expense Ratio, Adjusted EBITDAC, Adjusted EBITDAC Margin, Adjusted Net Income, Adjusted Net Income Margin and Adjusted Diluted Earnings per Share. See "Non-GAAP Financial Measures and Key Performance Indicators" for further information. Overview Founded byPatrick G. Ryan in 2010, we are a rapidly growing service provider of specialty products and solutions for insurance brokers, agents and carriers. We provide distribution, underwriting, product development, administration and risk management services by acting as a wholesale broker and a managing underwriter. Our mission is to provide industry-leading innovative specialty insurance solutions for insurance brokers, agents and carriers. For retail insurance brokers, we assist in the placement of complex or otherwise hard-to-place risks. For insurance carriers, we work with retail and wholesale insurance brokers to source, onboard, underwrite and service these same risks. A significant majority of the premiums we place are bound in the E&S market, which includesLloyd's of London . There is often significantly more flexibility in terms, conditions, and rates in the E&S market relative to the Admitted or "standard" insurance market. We believe that the additional freedom to craft bespoke terms and conditions in the E&S market allows us to best meet the needs of our trading partners, provide unique solutions and drive innovation. We believe our success has been achieved by providing best-in-class intellectual capital, leveraging our trusted and long-standing relationships, and developing differentiated solutions at a scale unmatched by many of our competitors. Significant Events and Transactions
Effects of the Reorganization on Our Corporate Structure
We were incorporated inMarch 2021 and formed for the purpose of the IPO. We are a holding company and our sole material asset is a controlling equity interest inNew RSG Holdings , which is also a holding company and its sole material asset is a controlling equity interest inRSG LLC . The Company will operate and control the business and affairs, and consolidate the financial results, ofRSG LLC throughNew RSG Holdings and, throughRSG LLC . AsRSG LLC is substantively the same asNew RSG Holdings , for the purpose of this discussion, we will refer to bothNew RSG Holdings andRSG LLC asRSG LLC .RSG LLC is a limited liability company taxed as a partnership for income tax purposes, and its taxable income or loss is passed through to its members, including the Company.RSG LLC is subject to income taxes on its taxable income in certain foreign countries, in certain state and local jurisdictions that impose income taxes on partnerships, and on the taxable income of itsU.S. corporate subsidiary. After the IPO,RSG LLC continues to be treated as a pass-through entity forU.S. federal and state income tax purposes. As a result of our ownership of LLC Common Units, we are subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofRSG LLC and are taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our operations and we will be required to make payments under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot estimate the likely tax benefits we will realize as a result of LLC Common Unit exchanges, and the resulting amounts we are likely to pay out to LLC Unitholders and Onex pursuant to the Tax Receivable Agreement; however, we estimate that such tax benefits and the related TRA payments may be substantial. We intend to causeRSG LLC to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement. 40 --------------------------------------------------------------------------------
Response to COVID-19
An outbreak of a novel strain of the coronavirus, COVID-19, was recognized as a pandemic by theWorld Health Organization onMarch 11, 2020 . Our leadership took decisive, timely steps to protect the health, safety and wellbeing of our employees, their families and trading partners by closing nearly all in-office operations, restricting business travel and transitioning to a remote work environment. The investments we made in our culture, trading partner relationships, business, technology and IT team members allowed for a seamless transition. Due to the success of our remote work operations during the pandemic, we will be implementing remote work flexibility into our operating model as we begin to transition back into the office. While the pandemic has had a significant detrimental effect on numerous segments of the global economy, it provided opportunities for many aspects of our Wholesale Brokerage, Binding Authority and Underwriting Management Specialties. We believe the pandemic resulted in an increased flow of submissions into the E&S market and a further hardening of E&S insurance rates (which had already been happening since 2019), thereby yielding higher premiums. Highlighting the resilience of our business, the dedication of our workforce, and the E&S market opportunities created by the pandemic, in 2020 we completed the All Risks Acquisition (the largest in our history), made substantial progress on our integration and the Restructuring Plan and realized 20.4% organic revenue growth, all in the midst of the pandemic. We managed to sustain this resilience in 2021 through the continued advancement of the integration and Restructuring Plan and realized 52.5% revenue growth and 25.6% organic revenue growth for the nine months endedSeptember 30, 2021 . While we believe our business and operations have thus far performed at a high level of efficiency and achieved historic results throughout the pandemic, there are no comparable recent events which may provide guidance as to the ultimate effect of the spread of COVID-19 and a global pandemic. As a result, the final impact of the pandemic or a similar health epidemic remains uncertain, particularly if new variants of the virus develop, vaccines are not distributed at a suitable pace or prove less effective than anticipated, the global economy does not recover as expected, especially in light of current inflationary trends and/or the pandemic otherwise continues beyond current expectations. The effects could yet have a material impact on our results of operations. See "Risk Factors-Risks Related to Our Business and Industry" in our IPO Prospectus for a discussion of the risks related to the COVID-19 pandemic.
2020 Restructuring Plan
During the third quarter of 2020 and in conjunction with the All Risks Acquisition, we initiated the Restructuring Plan in an effort to reduce costs and increase efficiencies, streamline management reporting structures, and centralize functions across the Company to improve operating margin. The Restructuring Plan is expected to generate annual savings of$25.0 million once the plan is fully actioned byJune 30, 2022 . Initial savings began to materialize in 2020 with the full run-rate savings expected to be realized byJune 30, 2023 . Of the$25.0 million of expected annual savings, approximately 90% will relate to a reduction in workforce with the remaining 10% related to lease and contract terminations. The Restructuring Plan is expected to incur cumulative one-time charges of between$30.0 million and$35.0 million , funded through operating cash flow. Restructuring costs will primarily be included in Compensation and benefits expense with the remaining costs in General and administrative expense. See Note 5, Restructuring of the unaudited quarterly consolidated financial statements for further discussion. We began recognizing costs associated with the Restructuring Plan in the third quarter of 2020. For the three and nine months endedSeptember 30, 2021 , we incurred restructuring costs of$3.2 million and$13.1 million , respectively, and cumulative restructuring costs of$24.0 million since the inception of the plan. These costs are offset by realized respective savings of approximately$6.3 million and$16.7 million for the three and nine months endedSeptember 30, 2021 . Of the cumulative$24.0 million costs,$19.4 million was workforce-related with the remaining being general and administrative costs. While the current results of the Restructuring Plan are in line with expectations, changes to the total savings estimate and timing of the Restructuring Plan may evolve as we continue to progress through the plan and evaluate other potential restructuring opportunities. The actual amounts and timing may vary significantly based on various factors. Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Pursue Strategic Acquisitions
We have successfully integrated businesses complementary to our own to increase both our distribution reach and our product capabilities. We continuously evaluate acquisitions and intend to further pursue targeted acquisitions that complement our product capabilities or provide us access to new markets. We have previously made and intend to continue to make acquisitions with the objective of enhancing our human capital and product capabilities, entering natural adjacencies and expanding our geographic footprint. Our ability to successfully pursue strategic acquisitions is dependent upon a number of factors, including sustained 41
-------------------------------------------------------------------------------- execution of a disciplined and selective acquisition strategy and our ability to effectively integrate targeted companies or assets and grow our business. We do not have agreements or commitments for any significant acquisitions at this time.
Deepen and Broaden our Relationships with
We have deep engagement with our retail broker trading partners. We believe we have the ability to transact in even greater volume with nearly all of our existing retail brokerage trading partners. For example, in 2020, our revenue derived from the Top 100 firms (as ranked byBusiness Insurance ) expanded faster than our overall growth rate of 20%. Our ability to deepen and broaden relationships with our retail broker partners and increase sales is dependent upon a number of factors, including client satisfaction with our distribution reach and our product capabilities, competition, pricing, economic conditions and spending on our product offerings.
Build our National Binding Authority Business
We believe there is substantial opportunity to continue to grow our binding authority business, as we believe that both M&A consolidation and panel consolidation are in nascent stages in the binding authority market. Our ability to grow our binding authority business is dependent upon a number of factors, including the quality of our services and product offerings, marketing and sales efforts to drive new business prospects and execution, new product offerings, the pricing and quality of our competitors' offerings and the growth in demand of the insurance products.
Invest in Operation and Growth
We have heavily invested in building a durable business that is able to adapt to the continuously evolving E&S market and intend to continue to do so. We are focused on enhancing the breadth of our product offerings as well as developing and launching new solutions to address the evolving needs of the specialty insurance industry. Our future success is dependent on our ability to successfully develop, market and sell existing and new products to both new and existing trading partners.
Generate Commission Regardless of the State of the Specialty Insurance Market
We generate commissions, which are calculated as a percentage of the total insurance policy premium, and fees. A softening of the insurance market or specialty lines that are our focus, characterized by a period of declining premium rates, could negatively impact our profitability.
Leverage the Growth of the E&S Market
The growing relevance of the E&S market has been driven by the rapid emergence of large, complex and high-hazard risks across many lines of insurance. This trend continued in 2020 and the first three quarters of 2021, with a record 30 named storms during the 2020Atlantic hurricane season, over 10.3 million acres burned through wildfires inthe United States , escalating jury verdicts and social inflation, a proliferation of cyber threats, novel health risks, and the transformation of the economy to a "digital first" mode of doing business. We believe that as the complexity of the E&S market continues to escalate, wholesale brokers and managing underwriters that do not have sufficient scale or the financial and intellectual capital to invest in the required specialty capabilities will struggle to compete effectively. This will further the trend of market share consolidation among the wholesale firmswho have these capabilities. We will continue to invest in our intellectual capital to innovate and offer custom solutions and products to better address changing market fundamentals.
Address Costs of being a
As we are in the early stages of our operation as a public company, we will continue to implement changes in certain aspects of our business and develop, manage and train management level and other employees to comply with ongoing public company requirements. We also incur new expenses as a public company, including public reporting obligations, increased professional fees for accounting, proxy statements, shareholder meetings, stock exchange fees, transfer agent fees,SEC andFINRA filing fees, legal fees and offering expenses. 42 --------------------------------------------------------------------------------
Summary of Financial Performance Highlights Three months ended Nine months ended September 30, Change September 30, Change (in thousands, except percentages) 2021 2020 $ % 2021 2020 $ % GAAP financial measures Total revenue$ 352,766 $ 236,811 $ 115,955 49.0 %$ 1,054,236 $ 691,327 $ 362,909 52.5 % Compensation and benefits 286,538 162,981 123,557 75.8 737,825 461,094 276,731 60.0 General and administrative 38,754 31,370 7,384
23.5 96,984 81,755 15,229 18.6 Total operating expenses 353,496 210,985 142,511 67.5 922,861 581,293 341,568 58.8 Operating income (loss) (730 ) 25,826 (26,556 ) (102.8 ) 131,375 110,034 21,341 19.4 Net income (loss)
(32,590 ) 10,796 (43,386 )
(401.9 ) 27,016 74,001 (46,985 ) (63.5 ) Net income (loss) attributable
to members (1,334 ) 10,211 (11,545 ) (113.1 ) 55,822 72,470 (16,648 ) (23.0 ) Compensation and Benefits Expense Ratio 81.2 % 68.8 % 70.0 % 66.7 % General and Administrative Expense Ratio 11.0 % 13.2 % 9.2 % 11.8 % Net Income (Loss) Margin (9.2 )% 4.6 % 2.6 % 10.7 % Earnings (Loss) per Share$ (0.16 ) $ (0.16 ) Diluted Earnings (Loss) per Share$ (0.16 ) $ (0.16 ) Non-GAAP financial measures* Organic Revenue Growth Rate 28.9 % 13.6 % 25.6 % 19.8 % Adjusted Compensation and Benefits Expense$ 212,590 $ 149,058 $ 63,532
42.6 %
Benefits Expense Ratio 60.3 % 62.9 % 59.3 % 62.8 %
Adjusted General and
Administrative Expense
Administrative Expense Ratio 10.0 % 8.6 % 8.4 % 9.5 % Adjusted EBITDAC$ 105,023 $ 67,360 $ 37,663
55.9 %
32.2 % 27.7 % Adjusted Net Income$ 62,949 $ 41,664 $ 21,285 51.1 %$ 209,739 $ 121,261 $ 88,478 73.0 % Adjusted Net Income Margin 17.8 % 17.6 % 19.9 % 17.5 % Adjusted Diluted Earnings per Share$ 0.24 $ 0.78 * For a definition and a reconciliation of Organic Revenue Growth Rate, Adjusted Compensation and Benefits, Adjusted Compensation and Benefits Expense Ratio, Adjusted General and Administrative Expense, Adjusted General and Administrative Expense Ratio, Adjusted EBITDAC, Adjusted EBITDAC Margin, Adjusted Net Income, Adjusted Net Income Margin, and Adjusted Diluted Earnings per Share to the most directly comparable GAAP measure, see "Non-GAAP Financial Measures and Key Performance Indicators."
Comparison of the Three Months Ended
? Revenue increased$116.0 million or 49.0% period-over-period to$352.8 million . ? Compensation and benefits expense increased$123.6 million , or 75.8%, and the Compensation and Benefits Expense Ratio increased 12.4% from 68.8% to 81.2% period-over-period. ? General and administrative expense increased$7.4 million , or 23.5%, and the General and Administrative Expense Ratio decreased 2.2% from 13.2% to 11.0% period-over-period. ? Total operating expenses increased$142.5 million or 67.5% period-over-period to$353.5 million . ? Operating income (loss) decreased$26.6 million period-over-period to a net loss of$(0.7) million . ? Net Income (loss) decreased by$43.4 million to period-over-period to a net loss of$(32.6) million . ? Net Income (Loss) Margin was (9.2)% for the quarter, compared to 4.6% in the same quarter last year. ? Loss per share and Diluted loss per share were$(0.16) for the three months endedSeptember 30, 2021 . ? Organic Revenue Growth Rate for the quarter was 28.9%, compared to 13.6% in the same quarter last year-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. 43 -------------------------------------------------------------------------------- ? Adjusted Compensation and Benefits Expense increased$63.5 million , or 42.6%, and the Adjusted Compensation and Benefits Expense Ratio decreased 2.6% from 62.9% to 60.3% period-over-period - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted General and Administrative Expense increased$14.8 million , or 72.4%, and the Adjusted General and Administrative Expense Ratio increased 1.4% from 8.6% to 10.0% period-over-period - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted EBITDAC, increased 55.9% to$105.0 million -see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted EBITDAC Margin increased to 29.8% from 28.4% period-over-period-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted Net Income and Adjusted Net Income Margin increased to$62.9 million and 17.8%, respectively, from$41.7 million and 17.6% period-over-period-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted Diluted Earnings per Share was$0.24 for the three months endedSeptember 30 , 2021-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information.
Comparison of the Nine Months Ended
? Revenue increased$362.9 million or 52.5% year-over-year to$1,054.2 million . ? Compensation and benefits expense increased$276.7 million , or 60.0%, and the Compensation and Benefits Expense Ratio increased 3.3% from 66.7% to 70.0% period-over-period. ? General and administrative expense increased$15.2 million , or 18.6%, and the General and Administrative Expense Ratio decreased 2.6% from 11.8% to 9.2% period-over-period. ? Total operating expenses increased$341.6 million or 58.8% year-over-year to$922.9 million . ? Operating income increased$21.3 million period-over-period to$131.4 million . ? Net income decreased by$47.0 million period-over-period to$27.0 million . ? Net Income Margin was 2.6% for the nine months, compared to 10.7% for the same period in the prior year. ? Loss per share and Diluted loss per share were$(0.16) for the nine months endedSeptember 30, 2021 . ? Organic Revenue Growth Rate was 25.6% for the nine months endedSeptember 30, 2021 , compared to 19.8% for the same period in the prior year-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted Compensation and Benefits Expense increased$191.2 million , or 44.0% and the Adjusted Compensation and Benefits Expense Ratio decreased 3.5% from 62.8% to 59.3% period-over-period - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted General and Administrative Expense increased$23.5 million , or 36.0%, and the Adjusted General and Administrative Expense Ratio decreased 1.1% from 9.5% to 8.4% period-over-period - see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted EBITDAC increased 77.3% year-over-year to$339.9 million -see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted EBITDAC Margin increased to 32.2% from 27.7% year-over-year-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted Net Income and Adjusted Net Income Margin increased to$209.7 million and 19.9%, respectively, from$121.3 million and 17.5% for the nine months endedSeptember 30, 2021 compared to the same period in 2020-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. ? Adjusted Diluted Earnings per Share was$0.78 for the nine months endedSeptember 30 , 2021-see "Non-GAAP Financial Measures and Key Performance Indicators" for further information. 44 --------------------------------------------------------------------------------
Components of Results of Operations Revenue
Net Commissions and Fees
Net commissions and fees are derived primarily by commissions from our three Specialties, which are calculated as a percentage of the total insurance policy premium. We are paid commissions for our role as an intermediary in facilitating the placement of coverage in the insurance distribution chain. In our Wholesale Brokerage and Binding Authority Specialties, we generally work with retail insurance brokers to secure insurance coverage for their clients,who are the ultimate insured party. In our Underwriting Management Specialty, we generally work with retail insurance brokers and often other wholesale brokers to secure insurance coverage for the ultimate insured party. Our commissions and fees are usually a percentage of the premium paid by the insured and generally depend on the type of insurance, the carriers involved and the nature of the services we provide in a given transaction. We share a portion of these commissions with the retail insurance broker and recognize revenue on a net basis. Additionally, carriers may also pay us a contingent commission or volume-based commission, both of which represent forms of contingent or supplemental consideration associated with the placement of coverage and are based primarily on underwriting results, but may also contain considerations for only volume, growth and/or retention. We also receive loss mitigation and other fees that are not dependent on the placement of a risk.
Fiduciary Investment Income
Fiduciary investment income consists of interest earned on insurance premiums that are held in a fiduciary capacity, in cash and cash equivalents, until disbursed.
Expenses Compensation and Benefits Compensation and benefits is our largest expense. It consists of (i) salary, incentives and benefits paid and payable to employees, and commissions paid and payable to our producers; and (ii) equity-based compensation associated with the grants of awards to employees and executives. We operate in competitive markets for human capital and we need to maintain competitive compensation levels as we expand geographically and create new products and services.
General and Administrative
General and administrative expense includes travel and entertainment expenses, office expenses, accounting, legal, insurance and other professional fees, and other costs associated with our operations. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations.
Amortization
Amortization expense consists primarily of amortization related to intangible assets we acquired in connection with our acquisitions. Intangible assets consist of customer relationships, trade names, and internally developed software.
Interest
Interest expense consists of interest payable on indebtedness, imputed interest on finance leases and contingent consideration, and amortization of deferred debt issuance costs.
Other Non-Operating (Loss) Income
Other non-operating (loss) income includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value is due to the occurrence of a Realization Event in the third quarter of 2021, which was defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. It also includes the change in fair value of interest rate swaps which were extinguished in 2020 and the expense associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt in the first quarter of 2021.
Income Tax Expense (Benefit)
Income tax expense (benefit) includes tax on the Company's allocable share of
any net taxable income from
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Non-Controlling Interest
Our historical financial statements include the non-controlling interest related to the net income attributable to Ryan Re.
Results of Operations
Below is a summary table of the financial results and Non-GAAP measures that we find relevant to our business operations:
Three months ended Nine months ended September 30, Change September 30, Change (in thousands, except percentages) 2021 2020 $ % 2021 2020 $ % Revenue Net
commissions
and fees$ 352,610 $ 236,683 $ 115,927 49.0 %$ 1,053,800 $ 689,833 $ 363,967 52.8 % Fiduciary investment income 156 128 28 21.9 436 1,494 (1,058 ) (70.8 ) Total revenue$ 352,766 $ 236,811 $ 115,955 49.0 %$ 1,054,236 $ 691,327 $ 362,909 52.5 % Expenses Compensation and benefits 286,538 162,981 123,557 75.8
737,825 461,094 276,731 60.0 General and administrative 38,754 31,370 7,384 23.5
96,984 81,755 15,229 18.6 Amortization 26,982 15,640 11,342 72.5
82,095 34,789 47,306 136.0 Depreciation 1,179 1,029
150 14.6 3,601 2,658 943 35.5 Change in contingent consideration 43 (35 ) 78 (222.9 ) 2,356 997 1,359 136.3 Total operating expenses$ 353,496 $ 210,985 $ 142,511 67.5 % $
922,861
131,375$ 110,034 $ 21,341 19.4 % Interest expense 21,193 10,859 10,334 95.2 60,224 26,295 33,929 129.0 Income from equity method investment in related party 176 326 (150 ) (46.0 ) 610 413 197 47.7 Other non-operating (loss) income (16,211 ) (1,574 ) (14,637 ) 929.9 (45,547 ) (4,066 ) (41,481 ) 1,020.2 Income (loss) before income taxes$ (37,958 ) $ 13,719 $ (51,677 ) (376.7 )%$ 26,214 $ 80,086 $ (53,872 ) (67.3 )% Income tax expense (benefit) (5,368 ) 2,923 (8,291 ) (283.6 ) (802 ) 6,085 (6,887 ) (113.2 ) Net income (loss)$ (32,590 ) $ 10,796 $ (43,386 ) (401.9 )%$ 27,016 $ 74,001 $ (46,985 ) (63.5 )% GAAP financial measures Revenue$ 352,766 $ 236,811 $ 115,955 49.0 %$ 1,054,236 $ 691,327 $ 362,909 52.5 % Compensation and benefits 286,538 162,981 123,557 75.8
737,825 461,094 276,731 60.0 General and administrative 38,754 31,370 7,384 23.5
96,984 81,755 15,229 18.6 Net Income (loss)
$ (32,590 ) $ 10,796 $ (43,386 ) (401.9 )%$ 27,016 $ 74,001 $ (46,985 ) (63.5 )% Compensation and Benefits Expense Ratio 81.2 % 68.8 % 70.0 % 66.7 % General and Administrative Expense Ratio 11.0 % 13.2 % 9.2 % 11.8 % Net Income (loss) Margin (9.2 )% 4.6 % 2.6 % 10.7 % Earnings (loss) per Share$ (0.16 ) $ (0.16 ) Diluted Earnings (loss) per Share$ (0.16 ) $ (0.16 ) 46
-------------------------------------------------------------------------------- Three months ended Nine months ended September 30, Change September 30, Change (in thousands, except percentages) 2021 2020 $ % 2021 2020 $ % Non-GAAP financial measures* Organic Revenue Growth Rate 28.9 % 13.6 % 25.6 % 19.8 % Adjusted Compensation and Benefits Expense$ 212,590 $ 149,058 $ 63,532 42.6 %$ 625,452 $ 434,209 $ 191,243 44.0 % Adjusted Compensation and Benefits Expense Ratio 60.3 % 62.9 % 59.3 % 62.8 % Adjusted General and Administrative Expense$ 35,153 $ 20,393 $ 14,760 72.4 %$ 88,870 $ 65,366 $ 23,504 36.0 % Adjusted General and Administrative Expense Ratio 10.0 % 8.6 % 8.4 % 9.5 % Adjusted EBITDAC$ 105,023 $ 67,360 $ 37,663 55.9 %$ 339,914 $ 191,752 $ 148,162 77.3 % Adjusted EBITDAC Margin 29.8 % 28.4 % 32.2 % 27.7 % Adjusted Net Income$ 62,949 $ 41,664 $ 21,285 51.1 % $
209,739$ 121,261 $ 88,478 73.0 % Adjusted Net Income Margin 17.8 % 17.6 % 19.9 % 17.5 % Adjusted Diluted Earnings per Share$ 0.24 $ 0.78 * These measures are Non-GAAP. Please refer to the section entitled "Non-GAAP Financial Measures and Key Performance Indicators" below for definitions and reconciliations to the most directly comparable GAAP measure. Comparison of the Three Months EndedSeptember 30, 2021 and 2020
Revenue
Net Commissions and Fees
Net commissions and fees increased by
Three months endedSeptember 30 , % of
% of (in thousands, except percentages) 2021 total 2020 total
Change Wholesale Brokerage$ 229,146 65.0 %$ 154,484 65.3 %$ 74,662 48.3 % Binding Authorities 52,795 15.0 36,130 15.3 16,665 46.1 Underwriting Management 70,669 20.0 46,069 19.4 24,600 53.4 Total Net commissions and fees$ 352,610 $ 236,683 $ 115,927 49.0 % Wholesale Brokerage net commissions and fees increased by$74.7 million or 48.3% period-over-period, primarily due to strong organic growth within this specialty for the quarter as well as contributions from the All Risks Acquisition for the months of July and August. Binding Authority net commissions and fees increased by$16.7 million or 46.1% period-over-period, primarily due to strong organic growth within the specialty for the quarter as well as contributions from the All Risks Acquisition for the months of July and August.
Underwriting Management net commissions and fees increased by
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The following table sets forth our revenue by type of commission and fees:
Three months ended September 30, (in thousands, except % of % of percentages) 2021 total 2020 total Change Net commissions and policy$ 338,335 96.0 %$ 228,111 96.4 %$ 110,224 48.3 % fees Supplemental and contingent 8,313 2.3 5,026 2.1 3,287 65.4 commissions Loss mitigation and other fees 5,962 1.7 3,546 1.5 2,416 68.1 Total Net commissions and fees$ 352,610 $ 236,683
Net commissions and policy fees grew 48.3%, slightly lower than the overall net commissions and fee revenue growth of 49.0% for the three months endedSeptember 30, 2021 as compared to the same period in the prior year. The main drivers of this growth continue to be the acquisition of new business and expansion of ongoing client relationships in response to the increasing demand for new, complex E&S products as well as the inflow of risks from the admitted market into the E&S market. In aggregate, we experienced stable commission rates period over period. Net commissions and policy fees continue to represent more than 90% of total net commissions and fees period-over-period. Supplemental and contingent commissions increased 65.4% period-over-period driven by the performance of risks placed on eligible business and the addition to the supplemental and contingent commissions contributed by the All Risks Acquisition. Supplemental and contingent commissions continue to represent less than 10% of total commissions and fees period-over-period. Loss mitigation and other fees grew 68.1% period-over-period primarily due to increased capital markets activity in 2021. These fees continue to represent less than 2% of total net commissions and fees period-over-period.
Expenses
Compensation and Benefits
Compensation and benefits expense increased by$123.6 million or 75.8% from$163.0 million to$286.5 million for the three months endedSeptember 30, 2021 compared to the same period in 2020. The following were the principal drivers of this increase: ? A$57.6 million increase from Initial public offering related compensation expense, which reflects charges associated with both the revaluation of existing equity grants at the time of our IPO as well as the first quarter of expense related to the new awards issued in connection with the IPO. The expense associated with both the revaluation of existing awards as well as the issuance of new equity awards both directly relate to the Organizational Transactions and IPO, however amounts related to each will continue to be expensed over future periods as the underlying awards vest; ? Commissions increased$38.5 million or 57.1% period-over-period, driven by the 49.0% increase in total Net Commissions and Fees discussed above; ? A$6.9 million impact from acquisition related long-term incentive compensation, reflecting our assumption of obligations in the All Risks Acquisition. All Risks had previously established various performance and service based long-term incentive plans for executives, producers and key employees which provided that upon a change of control event, the aggregate amount payable under each plan would be calculated and fixed upon close of the change of control event. We expect to recognize acquisition related long-term incentive compensation expense of approximately$37.0 million for the twelve months ended 2021 and an aggregate of approximately$20.0 million thereafter; and ? The remaining$20.6 million period-over-period increase was driven by (i) the addition of 840 employees through the All Risks Acquisition, which closed onSeptember 1, 2020 and (ii) growth in the business. Overall headcount increased to 3,427 full-time employees as ofSeptember 30, 2021 from 3,316 as ofSeptember 30, 2020 . This expense increase was partially offset by$5.0 million of net savings related to the Restructuring Plan representing approximately$5.9 million of work-force related savings less one-time work-force related expense of$0.9 million for the three months endedSeptember 30, 2021 (see "Significant Events and Transactions-2020 Restructuring Plan" for further information).
The net impact of revenue growth and the factors above resulted in a Compensation and Benefits Expense Ratio increase of 12.4% from 68.8% to 81.2% period-over-period.
We expect to continue to experience a general rise in commissions, salaries, incentives and benefits expense commensurate with our expected growth in business volume, revenue and headcount.
48 --------------------------------------------------------------------------------
General and Administrative
General and administrative expense increased by$7.4 million or 23.5% from$31.4 million to$38.8 million for the three months endedSeptember 30, 2021 as compared to the same period in the prior year. A main driver of this increase was$3.4 million of increased travel and entertainment expense as travel restrictions associated with the pandemic began to lift compared to the same period in 2020. The remaining increase of$4.0 million was driven by$13.7 million of expenses incurred to accommodate revenue expansion and the All Risks Acquisition, such as IT, professional services, occupancy, and insurance, partially offset by a$9.7 million decrease in acquisition-related expense.
The net impact of revenue growth and the factors above resulted in a General and Administrative Expense Ratio decrease of 2.2% from 13.2% to 11.0% period-over-period.
Amortization
Amortization expense increased by$11.3 million or 72.5% from$15.6 million to$27.0 million for the three months endedSeptember 30, 2021 compared to the same period in the prior year. The main driver was approximately$18.5 million of amortization from acquired intangibles from the All Risks Acquisition. Our intangible assets decreased by$103.7 million as ofSeptember 30, 2021 as compared toSeptember 30, 2020 .
Interest
Interest expense increased$10.3 million or 95.2% from$10.9 million to$21.2 million for the three months endedSeptember 30, 2021 compared to the same period in the prior year. The main driver of the change in interest expense for the three months endedSeptember 30, 2021 was an increase in debt, which was undertaken in connection with the All Risks Acquisition completed inSeptember 2020 .
Other Non-Operating (Loss) Income
Other non-operating (loss) income decreased by$14.6 million to a loss of$16.2 million for the three months endedSeptember 30, 2021 as compared to a loss of$1.6 million in the same period in the prior year. The main driver of the loss was the$16.3 million change in the fair value of the embedded derivatives of our Redeemable Preferred Units. This embedded derivative is a make whole penalty payable when the Redeemable Preferred Units were redeemed less than five years from the anniversary of the their issuance date. The resulting loss recorded as ofSeptember 30, 2021 represents the recognition of the remaining make whole charge for the Redeemable Preferred Units, which were redeemed in connection with the Organizational Transactions and IPO.
Income before Income Taxes
Due to the factors above, Income (loss) before income taxes decreased
Income Tax Expense (Benefit) Income tax expense (benefit) decreased$8.3 million from$2.9 million to$(5.4) million for the three months endedSeptember 30, 2021 as compared to the same period in the prior year as a result of a loss allocated fromRSG LLC to the Company in the post-IPO period.
Net Income (Loss)
Net income (loss) decreased$43.4 million from a profit of$10.8 million to a loss of$(32.6) million for the three months endedSeptember 30, 2021 compared to the same period in the prior year as a result of the factors described above. Comparison of the Nine Months EndedSeptember 30, 2021 and 2020
Revenue
Net Commissions and Fees
Net commissions and fees increased by$364.0 million or 52.8% from$689.8 million to$1,053.8 million in 2021 period-over-period. The two main drivers of the revenue increase are 26.7% growth from the All Risks Acquisition and 25.6% of organic revenue growth. 49
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Nine months ended September 30, % of % of (in thousands, except percentages) 2021 total 2020 total Change Wholesale Brokerage$ 676,229 64.2 %$ 460,706 66.8 %$ 215,523 46.8 % Binding Authorities 161,436 15.3 101,837 14.8 59,599 58.5 Underwriting Management 216,135 20.5 127,290 18.4 88,845 69.8 Total Net commissions and fees$ 1,053,800 $ 689,833 $ 363,967 52.8 %
Wholesale Brokerage net commissions and fees increased by
Binding Authority net commissions and fees increased by$59.6 million or 58.5% period-over-period, primarily due to strong organic growth within this specialty as well as contributions from the All Risks Acquisition through August. All Risks contributed to organic growth for the month of September. Underwriting Management net commissions and fees increased by$88.8 million or 69.8% in 2021 as compared to 2020, primarily due to strong organic growth within the specialty, as well as the contributions from the All Risks Acquisition through August. All Risks contributed to organic growth for the month of September.
The following table sets forth our revenue by type of commission and fees:
Nine months ended September 30, (in thousands, except % of % of percentages) 2021 total 2020 total Change Net commissions and policy$ 1,007,192 95.6 %$ 655,309 95.0 %$ 351,883 53.7 % fees Supplemental and contingent 29,849 2.8 25,528 3.7 4,321 16.9 commissions Loss mitigation and other fees 16,759 1.6 8,996 1.3 7,763 86.3 Total Net commissions and fees$ 1,053,800 $ 689,833
Net commissions and policy fees increased 53.7% just ahead of the overall total net commissions and fees growth of 52.8% period-over-period. This growth was driven by increased volume from both new and existing clients in response to the increasing demand for E&S products. Multiple classes of risk experienced year-over-year premium rate increases, which drives commission revenue growth that is typically calculated as a percentage of total insurance policy premium. In aggregate, we experienced stable commission rates period over period. Net commissions and policy fees continue to represent more than 90% of total net commissions and fees period-over-period. Supplemental and contingent commissions increased 16.9% period-over-period driven by the performance of risks placed on eligible business and the additional supplemental and contingent commissions contributed by the All Risks Acquisition. Supplemental and contingent commissions continue to represent less than 10% of total commissions and fees period-over-period. Loss mitigation and other fees grew 86.3% period-over-period primarily due to increased capital markets activity in 2021. These fees continue to represent less than 2% of total net commissions and fees period-over-period.
Expenses
Compensation and Benefits
Compensation and benefits expense increased by$276.7 million or 60.0% from$461.1 million to$737.8 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. The following were the principal drivers of this increase: ? Commissions increased$117.3 million or 58.6% between periods, driven by the 52.8% increase in total net commissions and fees discussed above; ? A$57.6 million increase from Initial public offering related compensation expense, which reflects charges associated with both the revaluation of existing equity grants at the time of our IPO as well as the first quarter of expense related to the new awards issued in connection with the IPO. The expense associated with both the revaluation of existing awards 50 -------------------------------------------------------------------------------- as well as the issuance of new equity awards both directly relate to the Organizational Transactions and IPO, however amounts related to each will continue to be expensed over future periods as the underlying awards vest; ? A$24.4 million impact from acquisition related long-term incentive compensation, reflecting our assumption of obligations in the All Risks Acquisition. All Risks had previously established various performance and service based long-term incentive plans for executives, producers and key employees which provided that upon a change of control event, the aggregate amount payable under each plan would be calculated and fixed upon close of the change of control event. We expect to recognize acquisition related long-term incentive compensation expense of approximately$37.0 million in 2021, of which$27.4 million has been recognized for the nine months endedSeptember 30, 2021 , with approximately$20.0 million to be recognized thereafter; and ? The remaining$77.4 million period-over-period increase was driven by (i) the addition of 840 employees through the All Risks Acquisition, which closed onSeptember 1, 2020 , and (ii) growth in the business. Overall headcount increased to 3,427 full-time employees as ofSeptember 30, 2021 from 3,316 as ofSeptember 30, 2020 . This expense increase was partially offset by a$6.8 million of net savings related to the Restructuring Plan representing approximately$16.0 million of work-force related savings less one-time work-force related expense of$9.2 million for the nine months endedSeptember 30, 2021 (see "Significant Events and Transactions-2020 Restructuring Plan" for further information). The net impact of revenue growth and the factors above resulted in a Compensation and Benefits Expense Ratio increase of 3.3% from 66.7% to 70.0% period-over-period. We expect to continue to experience a general rise in commissions, salaries, incentives and benefits expense commensurate with our expected growth in business volume, revenue and headcount.
General and Administrative
General and administrative expense increased by$15.2 million or 18.6% period-over-period from$81.8 million to$97.0 million as a result of revenue expansion and the All Risks Acquisition. Such expenses incurred to accommodate both organic and inorganic revenue growth include IT, occupancy, insurance and professional services.
Travel and entertainment expense increased
The net impact of revenue growth and the factors above resulted in a General and Administrative Expense Ratio improvement of 2.6% from 11.8% to 9.2% period-over-period.
Amortization
Amortization expense increased by$47.3 million or 136.0% from$34.8 million to$82.1 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020. The main driver was approximately$50.5 million of amortization from acquired intangibles from the All Risks Acquisition. Our intangible assets decreased by$103.7 million as ofSeptember 30, 2021 as compared to as ofSeptember 30, 2020 .
Interest Expense
Interest expense increased$33.9 million or 129.0% from$26.3 million to$60.2 million period-over-period. The main driver of the change in interest expense for the nine months endedSeptember 30, 2021 was an increase in debt, which was undertaken in connection with the All Risks Acquisition completed inSeptember 2020 .
Other Non-Operating (Loss) Income
Other non-operating (loss) income decreased by$41.5 million from a loss of$4.1 million to a loss of$45.5 million for the nine months endedSeptember 30, 2021 . The main driver of the loss was a$36.9 million change in the fair value of the embedded derivatives of our Redeemable Preferred Units. This embedded derivative is a make whole penalty payable when the Redeemable Preferred Units were redeemed less than five years from the anniversary of their issuance date. The resulting loss recorded as ofSeptember 30, 2021 represents the recognition of the remaining make whole charge for the Redeemable Preferred Units, which were redeemed in connection with the Organizational Transactions and IPO. The second driver of this increase was$8.6 million of debt issuance costs written off due to the extinguishment of a portion of the term debt due to the repricing in the first quarter of 2021 which is partially offset by a loss on the interest rates swaps for the nine months endedSeptember 30, 2020 , which were settled during 2020. 51
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Income before Income Taxes
Due to the factors above, Income before income taxes decreased$53.9 million or 67.3% from$80.1 million to$26.2 million for the nine months endedSeptember 30, 2021 as compared to the same period in 2020.
Income Tax Expense (Benefit)
Income tax expense (benefit) decreased$6.9 million from$6.1 million to$(0.8) million period-over-period as a result of a loss allocated fromRSG LLC to the Company in the post-IPO period.
Net Income
Net income decreased
Non-GAAP Financial Measures and Key Performance Indicators We consider a variety of financial measures in assessing the performance of our business. We regularly review the following Non-GAAP measures when assessing performance: Organic Revenue Growth Rate, Adjusted Compensation and Benefits Expense, Adjusted Compensation and Benefits Expense Ratio, Adjusted General and Administrative Expense, Adjusted General and Administrative Expense Ratio, Adjusted EBITDAC, Adjusted EBITDAC Margin, Adjusted Net Income, Adjusted Net Income Margin, and Adjusted Diluted Earnings per Share. Our use of Non-GAAP financial measures may vary from the use of similar terms by other companies in our industry and accordingly may not be comparable to similarly titled measures used by other companies. As a result, Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for the consolidated financial statements prepared and presented in accordance with GAAP. The footnotes to the reconciliation tables below should be read in conjunction with the unaudited quarterly consolidated financial statements.
Organic Revenue Growth Rate
Organic Revenue Growth Rate is a Non-GAAP measure that we use to help management and investors understand and evaluate the growth of our business without the impacts of acquisitions, which affects the comparability of results from period to period. The Organic Revenue Growth Rate represents the percentage change in revenue, as compared to the same period for the year prior, adjusted for revenue attributable to recent acquisitions during the first 12 months ofRyan Specialty's ownership, and other adjustments such as contingent commissions, fiduciary investment income, and foreign exchange rates. This supplemental information related to the Organic Revenue Growth Rate represents a measure not in accordance withU.S. GAAP and should be viewed in addition to, not instead of, the consolidated financial statements. Industry peers provide similar supplemental information about their revenue performance, although they may not make identical adjustments. A reconciliation of Organic Revenue Growth Rate to Total Revenue Growth Rate, the most directly comparable GAAP measure, for each of the periods indicated is as follows (in percentages): Three months ended September 30, 2021 2020 Total Revenue Growth Rate (GAAP) (1) 49.0 % 22.4 % Less: Mergers and Acquisitions (2) (18.8 ) (9.8 ) Change in Other (3) (1.3 ) 1.0
Organic Revenue Growth Rate (Non-GAAP) 28.9 % 13.6 %
(1)
September 30, 2021 revenue of$352.8 million lessSeptember 30, 2020 revenue of$236.8 million is a$116.0 million period-over-period change. The change,$116.0 million , divided by theSeptember 30, 2020 revenue of$236.8 million is a total revenue change of 49.0%.September 30, 2020 revenue of$236.8 million lessSeptember 30, 2019 revenue of$193.5 million is a$43.3 million period-over-period change. The change,$43.3 million , divided by theSeptember 30, 2019 revenue of$193.5 million is a total revenue change of 22.4%. Refer to "Results of Operations" for further details. (2) The mergers and acquisitions adjustment excludes net commission and fees revenue generated during the first 12 months following an acquisition. The total adjustment for the three months endedSeptember 30, 2021 and three months endedSeptember 30, 2020 was$44.4 million and$19.0 million , respectively. 52 --------------------------------------------------------------------------------
(3)
The other adjustments exclude the period-over-period change in contingent commissions, fiduciary investment income, and foreign exchange rates. The total adjustment for the three months endedSeptember 30, 2021 and three months endedSeptember 30, 2020 was$2.9 million and$1.9 million , respectively. Nine months ended September 30, 2021 2020 Total Revenue Growth Rate (GAAP) (1) 52.5 % 26.8 % Less: Mergers and Acquisitions (2) (26.7 ) (7.5 ) Change in Other (3) (0.2 ) 0.5
Organic Revenue Growth Rate (Non-GAAP) 25.6 % 19.8 %
(1)
September 30, 2021 revenue of$1,054.2 million lessSeptember 30, 2020 revenue of$691.3 million is a$362.9 million year-over-year change. The change,$362.9 million , divided by theSeptember 30, 2020 revenue of$691.3 million is a total revenue change of 52.5%.September 30, 2020 revenue of$691.3 million lessSeptember 30, 2019 revenue of$545.3 million is a$146.1 million year-over-year change. The change,$146.1 million , divided by theSeptember 30, 2019 revenue of$545.3 million is a total revenue change of 26.8%. Refer to "Results of Operations" for further details. (2) The mergers and acquisitions adjustment excludes net commission and fees revenue generated during the first 12 months following an acquisition. The total adjustment for the nine months endedSeptember 30, 2021 and nine months endedSeptember 30, 2020 was$184.4 million and$40.6 million , respectively. (3) The other adjustments exclude the year-over-year change in contingent commissions, fiduciary investment income, and foreign exchange rates. The total adjustment for the nine months endedSeptember 30, 2021 and 2020 was$1.2 million and$3.2 million , respectively.
Adjusted Compensation and Benefits Expense and Adjusted Compensation and Benefits Expense Ratio
We believe Adjusted Compensation and Benefits Expense and Adjusted Compensation and Benefits Expense Ratio provide relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by management because it provides a clear representation of our core compensation and benefits and general and administrative expenses as well as improves comparability between periods, and eliminates the impact of the items that do not relate to the ongoing operations of the business.
We define Adjusted Compensation and Benefits Expense as Compensation and benefits adjusted to reflect items such as (i) equity-based compensation, (ii) acquisition and restructuring related compensation expense, and (iii) other exceptional or non-recurring items, as applicable. The most comparable GAAP financial metric is Compensation and Benefits Expense.
Adjusted Compensation and Benefits Expense Ratio is defined as Adjusted Compensation and Benefits Expense as a percentage of total revenue. The most comparable GAAP financial metric is Compensation and Benefits Expense Ratio.
53 --------------------------------------------------------------------------------
A reconciliation of Adjusted Compensation and Benefits Expense and Adjusted Compensation and Benefits Expense Ratio to Compensation and Benefits Expense and Compensation and Benefits Expense Ratio, the most directly comparable GAAP measures, for each of the periods indicated, is as follows:
Three months
ended
September 30 , (in thousands, except percentages) 2021
2020
Total Revenue$ 352,766 $
236,811
Compensation and Benefits Expense$ 286,538 $
162,981
Acquisition-related expense - (2,811 ) Acquisition related long-term incentive compensation (10,333 ) (3,419 ) Restructuring and related expense (895 ) (3,301 ) Amortization and expense related to discontinued (1,759 ) (1,974 ) prepaid incentives Equity-based compensation (3,371 ) (2,422 ) Discontinued programs expense - 4 Initial public offering related expense (57,590 )
-
Adjusted Compensation and Benefits Expense (1)
81.2 % 68.8 % Adjusted Compensation and Benefits Expense Ratio (3) 60.3 %
62.9 %
(1)
Adjustments to Compensation and Benefits Expense are described in the footnotes of the reconciliation of Adjusted EBITDAC to Net Income in "Adjusted EBITDAC and Adjusted EBITDAC Margin". (2) Compensation and Benefits Expense Ratio is Compensation and Benefits Expense as a percentage of total revenue. (3) Adjusted Compensation and Benefits Expense Ratio is Adjusted Compensation and Benefits Expense as a percentage of total revenue. Nine months
ended
September 30 , (in thousands, except percentages) 2021
2020
Total Revenue$ 1,054,236 $
691,327
Compensation and Benefits Expense$ 737,825 $
461,094
Acquisition-related expense - (4,423 ) Acquisition related long-term incentive (28,837 ) (4,483 ) compensation Restructuring and related expense (9,246 ) (3,301 ) Amortization and expense related to discontinued (5,441 ) (7,037 ) prepaid incentives Equity-based compensation (11,259 ) (7,153 ) Discontinued programs expense - (488 ) Initial public offering related expense (57,590 )
-
Adjusted Compensation and Benefits Expense (1)
70.0 % 66.7 % Adjusted Compensation and Benefits Expense Ratio 59.3 % 62.8 % (3) (1) Adjustments to Compensation and Benefits Expense are described in the footnotes of the reconciliation of Adjusted EBITDAC to Net Income in "Adjusted EBITDAC and Adjusted EBITDAC Margin". (2) Compensation and Benefits Expense Ratio is Compensation and Benefits Expense as a percentage of total revenue. (3) Adjusted Compensation and Benefits Expense Ratio is Adjusted Compensation and Benefits Expense as a percentage of total revenue.
Adjusted General and Administrative Expense and Adjusted General and Administrative Expense Ratio
We believe Adjusted General and Administrative Expense and Adjusted General and Administrative Expense Ratio provide relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by management because 54
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it provides a clear representation of our core general and administrative expenses as well as improves comparability between periods, and eliminates the impact of the items that do not relate to the ongoing operations of the business.
We define Adjusted General and Administrative Expense as General and Administrative expense adjusted to reflect items such as (i) acquisition and restructuring general and administrative related expense, and (ii) other exceptional or non-recurring items, as applicable. The most comparable GAAP financial metric is General and Administrative Expense.
Adjusted General and Administrative Expense Ratio is defined as Adjusted General and Administrative Expense as a percentage of total revenue. The most comparable GAAP financial metric is General and Administrative Expense Ratio. A reconciliation of Adjusted General and Administrative Expense and Adjusted General and Administrative Expense Ratio to General and Administrative Expense and General and Administrative Expense Ratio, the most directly comparable GAAP measures, for each of the periods indicated is as follows: Three months
ended
September 30 , (in thousands, except percentages) 2021
2020
Total Revenue$ 352,766 $
236,811
General and Administrative Expense$ 38,754 $
31,370
Acquisition-related expense (106 ) (9,792 ) Restructuring and related expense (2,465 ) (397 ) Discontinued programs expense - (698 ) Other non-recurring expense - (90 ) Initial public offering related expense (1,030 )
-
Adjusted General and Administrative Expense (1)
11.0 %
13.2 % Adjusted General and Administrative Expense Ratio (3) 10.0 % 8.6 %
(1)
Adjustments to General and Administrative Expense are described in the footnotes of the reconciliation of Adjusted EBITDAC to Net Income in "Adjusted EBITDAC and Adjusted EBITDAC Margin". (2) General and Administrative Expense Ratio is General and Administrative Expense as a percentage of total revenue. (3) Adjusted General and Administrative Expense Ratio is Adjusted General and Administrative Expense as a percentage of total revenue. Nine months
ended
September 30 , (in thousands, except percentages) 2021
2020
Total Revenue$ 1,054,236 $
691,327
General and Administrative Expense$ 96,984 $
81,755
Acquisition-related expense (2,128 ) (13,783 ) Restructuring and related expense (4,286 ) (1,822 ) Discontinued programs expense - (601 ) Other non-recurring expense (354 ) (183 ) Initial public offering related expense (1,346 )
-
Adjusted General and Administrative Expense (1)
9.2 % 11.8 % Adjusted General and Administrative Expense Ratio (3) 8.4 %
9.5 %
(1)
Adjustments to General and Administrative Expense are described in the footnotes of the reconciliation of Adjusted EBITDAC to Net Income in "Adjusted EBITDAC and Adjusted EBITDAC Margin". (2) General and Administrative Expense Ratio is General and Administrative Expense as a percentage of total revenue. (3) Adjusted General and Administrative Expense Ratio is Adjusted General and Administrative Expense as a percentage of total revenue. 55 --------------------------------------------------------------------------------
Adjusted EBITDAC and Adjusted EBITDAC Margin
We believe that Adjusted EBITDAC and Adjusted EBITDAC Margin provide relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by management because it provides a clear representation of our operating performance and the profitability of our business on a run-rate basis, improves comparability between periods, and eliminates the impact of the items that do not relate to the ongoing operating performance of the business. We define Adjusted EBITDAC as Net Income before interest expense, income tax expense (benefit), depreciation, amortization, and change in contingent consideration, adjusted to reflect items such as (i) equity-based compensation, (ii) acquisition and restructuring related expenses, and (iii) other exceptional or non-recurring items, as applicable. Total revenue less Adjusted Compensation and Benefits Expense and Adjusted General and Administrative Expense is equivalent to Adjusted EBITDAC. The most directly comparable GAAP financial metric is Net Income. Adjusted EBITDAC Margin is defined as Adjusted EBITDAC as a percentage of total revenue. The most comparable GAAP financial metric is Net Income Margin. These measures do not deduct earnings related to the non-controlling interest in Ryan Re for the period of time prior toMarch 31, 2021 when we did not own 100% of the business. Adjusted EBITDAC and Adjusted EBITDAC Margin may be useful to an investor in evaluating our operating performance and efficiency because these measures are widely used by investors to measure a company's operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending upon acquisition activity and capital structure, These measures also eliminate the impact of expenses that do not relate to core business performance, among other factors. Further, these measures are used by our leadership and Board of Directors for assessing financial performance, strategic planning, and forecasting.
Adjusted EBITDAC and Adjusted EBITDAC Margin have limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP.
A reconciliation of Adjusted EBITDAC and Adjusted EBITDAC Margin to Net Income and Net Income Margin, the most directly comparable GAAP measures, for each of the periods indicated is as follows: Three months
ended
September 30, (in thousands, except percentages) 2021 2020 Total Revenue$ 352,766 $ 236,811 Net Income (loss)$ (32,590 ) $ 10,796 Interest expense 21,193 10,859 Income tax expense (benefit) (5,368 ) 2,923 Depreciation 1,179 1,029 Amortization 26,982 15,640 Change in contingent consideration 43 (35 ) EBITDAC$ 11,439 $
41,212
Acquisition-related expense (1) 106
12,603
Acquisition related long-term incentive 10,333
3,419
compensation (2) Restructuring and related expense (3) 3,360
3,698
Amortization and expense related to discontinued 1,759
1,974
prepaid incentives (4) Other non-operating loss (income) (5) 16,211
1,574
Equity-based compensation (6) 3,371
2,422
Discontinued programs expense (7) -
694
Other non-recurring expense (8) -
90
IPO related expenses (9) 58,620
-
(Income) from equity method investments in (176 ) (326 ) related party Adjusted EBITDAC (10)$ 105,023 $ 67,360 Net Income (loss) Margin (11) (9.2 )% 4.6 % Adjusted EBITDAC Margin (12) 29.8 % 28.4 % (1) Acquisition-related expense includes diligence, transaction-related, and integration costs. Compensation and benefits expenses were$2.8 million for the three months endedSeptember 30, 2020 , while General and administrative expenses contributed to 56
--------------------------------------------------------------------------------$0.1 million and$9.8 million of the acquisition-related expense for the three months endedSeptember 30, 2021 and 2020, respectively. (2) Acquisition related long-term incentive compensation arises from long-term incentive plans associated with acquisitions. (3) Restructuring and related expense consists of compensation and benefits of$0.9 million and$3.3 million for the three months endedSeptember 30, 2021 and 2020, respectively, and General and administrative costs including occupancy and professional services fees of$2.5 million and$0.4 million for the three months endedSeptember 30, 2021 and 2020, respectively, related to the Restructuring Plan. The compensation and benefits expense includes severance as well as employment costs related to services rendered between the notification and termination dates. See Note 5, Restructuring of the unaudited quarterly consolidated financial statements for further discussion. The remaining costs that preceded the Restructuring Plan were associated with organizational design, other severance, and non-recurring lease costs. (4) Amortization and expense related to discontinued prepaid incentive programs - see Note 15. Employee Benefit Plans, Prepaid and Long-Term Incentives of the unaudited quarterly consolidated financial statements for further discussion. (5) Other non-operating loss (income) includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value of$16.2 million is due to the occurrence of a Realization Event in the third quarter, which is defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. See Note 11, Redeemable Preferred Units of the unaudited quarterly consolidated financial statements for further discussion. For the three months endedSeptember 30, 2020 , non-operating loss (income) includes the change in fair value of interest rate swaps which were discontinued in 2020. (6) Equity-based compensation reflects non-cash equity-based expense. (7) Discontinued programs expense includes$0.1 million of General and administrative expense for the three months endedSeptember 30, 2020 . Compensation and benefits expense was$0.0 million for the three months endedSeptember 30, 2020 . These costs were associated with concluding specific programs that are no longer core to our business. This adjustment also includes$0.6 million related to additional cancellation activity associated with these programs in the three months endedSeptember 30, 2020 . (8) Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes. (9) Initial public offering related expenses includes$1.0 million of General and Administrative expense associated with the preparations for Sarbanes-Oxley compliance, tax and accounting advisory services on IPO-related structure changes, and Compensation-related expense of$57.6 million for the three months endedSeptember 30, 2021 related to the revaluation of existing equity awards at IPO as well as initial period expense for new awards issued at IPO. (10) Consolidated Adjusted EBITDAC does not reflect a deduction for the Adjusted EBITDAC associated with the non-controlling interest in Ryan Re. (11) Net Income Margin is Net Income as a percentage of total revenue. (12) Adjusted EBITDAC margin is Adjusted EBITDAC as a percentage of total revenue. 57 -------------------------------------------------------------------------------- Nine months
ended
September 30, (in thousands, except percentages) 2021 2020 Total Revenue$ 1,054,236 $ 691,327 Net Income$ 27,016 $ 74,001 Interest expense 60,224 26,295 Income tax expense (benefit) (802 ) 6,085 Depreciation 3,601 2,658 Amortization 82,095 34,789 Change in contingent consideration 2,356
997
EBITDAC$ 174,490 $
144,825
Acquisition-related expense (1) 2,128
18,206
Acquisition related long-term incentive 28,837
4,483
compensation (2) Restructuring and related expense (3) 13,532
5,123
Amortization and expense related to discontinued 5,441
7,037
prepaid incentives (4) Other non-operating loss (income) (5) 45,547
4,066
Equity-based compensation (6) 11,259
7,153
Discontinued programs expense (7) -
1,089
Other non-recurring expense (8) 354
183
IPO related expenses (9) 58,936
-
(Income) from equity method investments in related (610 ) (413 ) party Adjusted EBITDAC (10)$ 339,914 $ 191,752 Net Income Margin (11) 2.6 % 10.7 % Adjusted EBITDAC Margin (12) 32.2 % 27.7 % (1) Acquisition-related expense includes diligence, transaction-related, and integration costs. Compensation and benefits expenses were$4.4 million for the nine months endedSeptember 30, 2020 , while General and administrative expenses contributed to$2.1 million and$13.8 million of the acquisition-related expense for the nine months endedSeptember 30, 2021 and 2020, respectively. (2) Acquisition related long-term incentive compensation arises from long-term incentive plans associated with acquisitions. (3) Restructuring and related expense consists of compensation and benefits of$9.2 million and$3.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively, and General and administrative costs including occupancy and professional services fees of$4.3 million and$1.8 million for the nine months endedSeptember 30, 2021 and 2020, respectively, related to the Restructuring Plan. The compensation and benefits expense includes severance as well as employment costs related to services rendered between the notification and termination dates. See Note 5, Restructuring of the unaudited quarterly consolidated financial statements for further discussion. The remaining costs that preceded the Restructuring Plan were associated with organizational design, other severance, and non-recurring lease costs. (4) Amortization and expense related to discontinued prepaid incentive programs - See Note 15, Employee Benefit Plans, Prepaid and Long-Term Incentives of the unaudited quarterly consolidated financial statements for further discussion. (5) Other non-operating loss (income) includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value of$36.9 million is due to the occurrence of a Realization Event in the third quarter, which is defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. See Note 11, Redeemable Preferred Units of the unaudited quarterly consolidated financial statements for further discussion. For the nine months endedSeptember 30, 2021 , non-operating loss (income) includes costs associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt. For the nine months endedSeptember 30, 2020 , non-operating loss (income) includes the change in fair value of interest rate swaps which were discontinued in 2020. (6) Equity-based compensation reflects non-cash equity-based expense. (7) Discontinued programs expense includes$0.3 million of General and administrative expense for the nine months endedSeptember 30, 2020 . Compensation and benefits expense was$0.5 million for the nine months endedSeptember 30, 2020 . These costs were associated with concluding specific programs that are no longer core to our business. This adjustment also includes$0.3 million related to additional cancellation activity associated with these programs in the nine months endedSeptember 30, 2020 58 --------------------------------------------------------------------------------
(8)
Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes. (9) Initial public offering related expenses include$1.3 million of General and Administrative expense associated with the preparations for Sarbanes-Oxley compliance, tax and accounting advisory services on IPO-related structure changes, and Compensation-related expense of$57.6 million for the three months endedSeptember 30, 2021 related to the revaluation of existing equity awards at IPO as well as initial period expense for new awards issued at IPO. (10) Consolidated Adjusted EBITDAC does not reflect a deduction for the Adjusted EBITDAC associated with the non-controlling interest in Ryan Re. (11) Net Income Margin is Net Income as a percentage of total revenue. (12) Adjusted EBITDAC margin is Adjusted EBITDAC as a percentage of total revenue.
Adjusted Net Income and Adjusted Net Income Margin
We define Adjusted Net Income as tax-effected earnings before amortization and certain items of income and expense, gains and losses, equity-based compensation, acquisition related long-term incentive compensation, acquisition-related expenses, costs associated with the IPO and certain exceptional or non-recurring items. The most comparable GAAP financial metric is Net Income. Adjusted Net Income Margin is calculated as Adjusted Net Income as a percentage of total revenue. The most comparable GAAP financial metric is Net Income Margin. These measures do not deduct earnings related to the non-controlling interest in Ryan Re for the period of time prior toMarch 31, 2021 when we did not own 100% of the business. Following the IPO the Company is subject toUnited States federal income taxes, in addition to state, local, and foreign taxes, with respect to our allocable share of any net taxable income ofRSG LLC . For comparability purposes, this calculation incorporates the impact of federal and state statutory tax rates on 100% of our adjusted pre-tax income as if the Company owned 100% ofRSG LLC . Adjusted Net Income and Adjusted Net Income Margin, together with related margins may be useful to an investor in evaluating our operating performance, efficiency and liquidity because these measures are widely used by investors to measure a company's operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending upon acquisition activity and capital structure. These measures also eliminate the impact of expenses that do not relate to core business performance, among other factors. Further, these measures are used by our leadership and Board of Directors for assessing financial performance, strategic planning, and forecasting. These Non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP. 59
-------------------------------------------------------------------------------- A reconciliation of Adjusted Net Income and Adjusted Net Income Margin to Net Income and Net Income Margin, the most directly comparable GAAP measures, for each of the periods indicated is as follows: Three months
ended
September 30, (in thousands, except percentages) 2021 2020 Total Revenue$ 352,766 $ 236,811 Net Income (loss)$ (32,590 ) $ 10,796 Income tax expense (benefit) (5,368 ) 2,923 Amortization 26,982 15,640 Amortization of deferred issuance costs (1) 2,777
1,070
Change in contingent consideration 43 (35 ) Acquisition-related expense (2) 106
12,603
Acquisition related long-term incentive 10,333
3,419
compensation (3) Restructuring expense (4) 3,360
3,698
Amortization and expense related to discontinued 1,759
1,974
prepaid incentives (5) Other non-operating loss (income) (6) 16,211
1,574
Equity-based compensation (7) 3,371
2,422
Discontinued programs expense (8) -
694
Other non-recurring expense (9) -
90
IPO related expenses (10) 58,620
-
(Income) / loss from equity method investments in (176 ) (326 ) related party Adjusted Income before Income Taxes$ 85,428 $ 56,542 Adjusted tax expense (11) (22,479 ) (14,878 ) Adjusted Net Income (12)$ 62,949 $ 41,664 Net Income (loss) Margin (13) (9.2 )% 4.6 % Adjusted Net Income Margin (14) 17.8 %
17.6 %
(1)
Interest Expense includes amortization of deferred issuance costs. (2) Acquisition-related expense includes diligence, transaction-related, and integration costs. Compensation and benefits expenses were$2.8 million for the three months endedSeptember 30, 2020 , while General and administrative expenses contributed to$0.1 million and$9.8 million of the acquisition-related expense for the three months endedSeptember 30, 2021 and 2020, respectively. (3) Acquisition related long-term incentive compensation arises from long-term incentive plans associated with acquisitions. (4) Restructuring and related expense consists of compensation and benefits of$0.9 million and$3.3 million for the three months endedSeptember 30, 2021 and 2020, respectively, and General and administrative costs including occupancy and professional services fees of$2.5 million and$0.4 million for the three months endedSeptember 30, 2021 and 2020, respectively, related to the Restructuring Plan. The compensation and benefits expense includes severance as well as employment costs related to services rendered between the notification and termination dates. See Note 5, Restructuring of the unaudited quarterly consolidated financial statements for further discussion. The remaining costs that preceded the Restructuring Plan were associated with organizational design, other severance, and non-recurring lease costs. (5) Amortization and expense related to discontinued prepaid incentive programs - see Note 15. Employee Benefit Plans, Prepaid and Long-Term Incentives of the unaudited quarterly consolidated financial statements for further discussion. (6) Other non-operating loss (income) includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value of$16.2 million is due to the occurrence of a Realization Event in the third quarter, which is defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. See Note 11, Redeemable Preferred Units of the unaudited quarterly consolidated financial statements for further discussion. For the three months endedSeptember 30, 2020 , non-operating loss (income) includes the change in fair value of interest rate swaps which were discontinued in 2020. (7) Equity-based compensation reflects non-cash equity-based expense. (8) Discontinued programs expense includes$0.1 million of General and administrative expense for the three months endedSeptember 30, 2020 . Compensation and benefits expense was$0.0 million for the three months endedSeptember 30, 2020 . 60
-------------------------------------------------------------------------------- These costs were associated with concluding specific programs that are no longer core to our business. This adjustment also includes$0.6 million related to additional cancellation activity associated with these programs in the three months endedSeptember 30, 2020 . (9) Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes. (10) Initial public offering related expenses includes$1.0 million of General and Administrative expense associated with the preparations for Sarbanes-Oxley compliance, tax and accounting advisory services on IPO-related structure changes, and Compensation-related expense of$57.6 million for the three months endedSeptember 30, 2021 related to the revaluation of existing equity awards at IPO as well as initial period expense for new awards issued at IPO. (11) The Company is subject toUnited States federal income taxes, in addition to state, local, and foreign taxes, with respect to our allocable share of any net taxable income ofRyan Specialty Group, LLC . For comparability purposes, this calculation of adjusted tax expense incorporates the impact of federal and state statutory tax rates on 100% of our adjusted pre-tax income as if the Company owned 100% ofRyan Specialty Group, LLC . (12) Consolidated Adjusted Net Income does not reflect a deduction for the Adjusted Net Income associated with the non-controlling interest in Ryan Re. (13) Net Income Margin is Net Income as a percentage of total revenue. (14) Adjusted Net Income Margin is Adjusted Net Income as a percentage of total revenue. Nine months
ended
September 30, (in thousands, except percentages) 2021 2020 Total Revenue$ 1,054,236 $ 691,327 Net Income$ 27,016 $ 74,001 Income tax expense (benefit) (802 ) 6,085 Amortization 82,095 34,789 Amortization of deferred issuance costs (1) 8,546
1,763
Change in contingent consideration 2,356
997
Acquisition-related expense (2) 2,128
18,206
Acquisition related long-term incentive 28,837
4,483
compensation (3) Restructuring expense (4) 13,532
5,123
Amortization and expense related to discontinued 5,441
7,037
prepaid incentives (5) Other non-operating loss (income) (6) 45,547
4,066
Equity-based compensation (7) 11,259
7,153
Discontinued programs expense (8) -
1,089
Other non-recurring items (9) 354
183
IPO related expenses (10) 58,936
-
(Income) / loss from equity method investments in (610 ) (413 ) related party Adjusted Income before Income Taxes$ 284,635 $ 164,562 Adjusted tax expense (11) (74,896 ) (43,301 ) Adjusted Net Income (12)$ 209,739 $ 121,261 Net Income Margin (13) 2.6 % 10.7 % Adjusted Net Income Margin (14) 19.9 %
17.5 %
(1)
Interest Expense includes amortization of deferred issuance costs. (2) Acquisition-related expense includes diligence, transaction-related, and integration costs. Compensation and benefits expenses were$4.4 million for the nine months endedSeptember 30, 2020 , while General and administrative expenses contributed to$2.1 million and$13.8 million of the acquisition-related expense for the nine months endedSeptember 30, 2021 and 2020, respectively. (3) Acquisition related long-term incentive compensation arises from long-term incentive plans associated with acquisitions. (4) Restructuring and related expense consists of compensation and benefits of$9.2 million and$3.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively, and General and administrative costs including occupancy and professional 61 -------------------------------------------------------------------------------- services fees of$4.3 million and$1.8 million for the nine months endedSeptember 30, 2021 and 2020, respectively, related to the Restructuring Plan. The compensation and benefits expense includes severance as well as employment costs related to services rendered between the notification and termination dates. See Note 5, Restructuring of the unaudited quarterly consolidated financial statements for further discussion. The remaining costs that preceded the Restructuring Plan were associated with organizational design, other severance, and non-recurring lease costs. (5) Amortization and expense related to discontinued prepaid incentive programs - See Note 15, Employee Benefit Plans, Prepaid and Long-Term Incentives of the unaudited quarterly consolidated financial statements for further discussion. (6) Other non-operating loss (income) includes the change in fair value of the embedded derivatives on the Redeemable Preferred Units. This change in fair value of$36.9 million is due to the occurrence of a Realization Event in the third quarter, which is defined as a Qualified Public Offering or a Sale Transaction in the Onex Purchase Agreement. See Note 11, Redeemable Preferred Units of the unaudited quarterly consolidated financial statements for further discussion. For the nine months endedSeptember 30, 2021 , non-operating loss (income) includes costs associated with the extinguishment of a portion of our deferred debt issuance costs on the term debt. For the nine months endedSeptember 30, 2020 , non-operating loss (income) includes the change in fair value of interest rate swaps which were discontinued in 2020. (7) Equity-based compensation reflects non-cash equity-based expense. (8) Discontinued programs expense includes$0.3 million of General and administrative expense for the nine months endedSeptember 30, 2020 . Compensation and benefits expense was$0.5 million for the nine months endedSeptember 30, 2020 . These costs were associated with concluding specific programs that are no longer core to our business. This adjustment also includes$0.3 million related to additional cancellation activity associated with these programs in the nine months endedSeptember 30, 2020 (9) Other non-recurring items include one-time professional services costs associated with term debt repricing, and one-time non-income tax charges and tax and accounting consultancy costs associated with potential structure changes. (10) Initial public offering related expenses include$1.3 million of General and Administrative expense associated with the preparations for Sarbanes-Oxley compliance, tax and accounting advisory services on IPO-related structure changes, and Compensation-related expense of$57.6 million for the three months endedSeptember 30, 2021 related to the revaluation of existing equity awards at IPO as well as initial period expense for new awards issued at IPO. (11) The Company is subject toUnited States federal income taxes, in addition to state, local, and foreign taxes, with respect to our allocable share of any net taxable income ofRyan Specialty Group, LLC . For comparability purposes, this calculation of adjusted tax expense incorporates the impact of federal and state statutory tax rates on 100% of our adjusted pre-tax income as if the Company owned 100% ofRyan Specialty Group, LLC . (12) Consolidated Adjusted Net Income does not reflect a deduction for the Adjusted Net Income associated with the non-controlling interest in Ryan Re. (13) Net Income Margin is Net Income as a percentage of total revenue. (14) Adjusted Net Income Margin is Adjusted Net Income as a percentage of total revenue.
Adjusted Diluted Earnings per Share
We define Adjusted Diluted Earnings per Share as Adjusted Net Income divided by diluted shares outstanding after adjusting for the effect of the exchange of 100% of the outstanding LLC Common Units (together with the shares of Class B common stock) into shares of Class A common stock and the effect of unvested equity awards. This measure does not deduct earnings related to the non-controlling interest in Ryan Re for the period of time prior toMarch 31, 2021 when we did not own 100% of the business. The most directly comparable GAAP financial metric is diluted earnings per share. Adjusted Diluted Earnings per Share may be useful to an investor in evaluating our operating performance and efficiency because this measure is widely used by investors to measure a company's operating performance without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending upon acquisition activity and capital structure. This measure also eliminates the impact of expenses that do not relate to core business performance, among other factors. Further, this measure is used by our leadership and Board of Directors for assessing financial performance, strategic planning, and forecasting. This Non-GAAP measure has limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under GAAP. 62
-------------------------------------------------------------------------------- A reconciliation of Adjusted Diluted Earnings per Share to Diluted Earnings per Share, the most directly comparable GAAP measure, for each of the periods indicated is as follows: Three months ended September 30, 2021 Adjustments Plus: Net Plus: Impact income (loss) of all LLC attributable to Common Units Plus: Plus: Dilutive RSG LLC before exchanged for Adjustments to impact of Adjusted (in thousands, the Class A
Adjusted Net unvested equity Diluted except per share
Organizational shares Income awards Earnings per data) U.S. GAAP Transactions (1) (2) (3) Share Numerator: Net income (loss) attributable to Class A common shareholders- diluted$ (17,115 ) $ 15,781 $ (31,256 ) $ 95,539 $ -$ 62,949 Denominator: Weighted-average shares of Class A common stock outstanding- diluted 105,309 - 142,727 - 19,684 267,721 Net income (loss) per share of Class A common stock- diluted$ (0.16 ) $ 0.15$ (0.12 ) $ 0.39 $ (0.02 )$ 0.24 (1) For comparability purposes, this calculation incorporates the net income (loss) and weighted average shares of Class A common stock that would be outstanding if all LLC Common Units (together with shares of Class B common stock) were exchanged for shares of Class A common stock. (2) Adjustments to Adjusted Net Income are described in the footnotes of the reconciliation of Adjusted Net Income to Net Income in "Adjusted Net Income and Adjusted Net Income Margin". (3) For comparability purposes and to be consistent with the treatment of the adjustments to arrive at Adjusted Net Income, the dilutive effect of unvested equity awards is calculated using the treasury stock method as if the weighted average unrecognized cost associated with the awards was$0 over the period, less any unvested equity awards determined to be dilutive within the Diluted Loss Per Share calculation disclosed in Note 13, Loss Per Share of the unaudited quarterly consolidated financial statements. Nine months ended September 30, 2021 Adjustments Plus: Net Plus: Impact income (loss) of all LLC attributable to Common Units Plus: Plus: Dilutive RSG LLC before exchanged for Adjustments to impact of Adjusted (in thousands, the Class A Adjusted Net unvested equity Diluted except per share Organizational shares Income awards Earnings per data) U.S. GAAP Transactions (1) (2) (3) Share Numerator: Net income (loss) attributable to Class A common shareholders- diluted$ (17,115 ) $ 75,387 $ (31,256 ) $ 182,723 $ -$ 209,739 Denominator: Weighted-average shares of Class A common stock outstanding- diluted 105,309 - 142,727 - 19,684 267,721 Net income (loss) per share of Class A common stock- diluted$ (0.16 ) $ 0.72$ (0.44 ) $ 0.74 $ (0.06 )$ 0.78 (1) For comparability purposes, this calculation incorporates the net income (loss) and weighted average shares of Class A common stock that would be outstanding if all LLC Common Units (together with shares of Class B common stock) were exchanged for shares of Class A common stock. (2) Adjustments to Adjusted Net Income are described in the footnotes of the reconciliation of Adjusted Net Income to Net Income in "Adjusted Net Income and Adjusted Net Income Margin". (3) For comparability purposes and to be consistent with the treatment of the adjustments to arrive at Adjusted Net Income, the dilutive effect of unvested equity awards is calculated using the treasury stock method as if the weighted average unrecognized cost associated with the awards was$0 over the period, less any unvested equity awards determined to be dilutive within the 63 --------------------------------------------------------------------------------
Diluted Loss Per Share calculation disclosed in Note 13, Loss Per Share of the unaudited quarterly consolidated financial statements.
Liquidity and Capital Resources Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations. We believe that the balance sheet and strong cash flow profile of the business provides adequate liquidity. The primary sources of liquidity are cash and cash equivalents on the balance sheet, cash flows provided by operations and debt capacity available under our credit facilities. The primary uses of liquidity are operating expenses, seasonal working capital needs, business combinations, and distributions to members. We believe that cash flows from operations and available credit facilities will be sufficient to meet the liquidity needs, including principal and interest payments on debt obligations, capital expenditures, and anticipated working capital requirements, for the next 12 months and beyond. Cash on the balance sheet includes funds available for general corporate purposes. We will recognize fiduciary amounts due to others as fiduciary liabilities and fiduciary amounts collectible and held on behalf of others, including insurance policyholders, clients, other insurance intermediaries, and insurance carriers, as fiduciary assets in the Consolidated Balance Sheets. Fiduciary assets cannot be used for general corporate purposes. Insurance premiums and claims are held in a fiduciary capacity and the obligation to remit these funds is recorded as Fiduciary liabilities in the Consolidated Balance Sheets. In our capacity as an insurance broker or agent, we collect premiums from insureds and, after deducting our commission, remit the premiums to the respective insurance markets and carriers. We also collect claims prefunding or refunds from carriers on behalf of insureds, which are then returned to the insureds. Insurance premiums and claim funds are held in a fiduciary capacity. The levels of fiduciary assets and liabilities can fluctuate significantly depending on when we collect the premiums, claims prefunding, and refunds, make payments to markets, carriers, and insureds, and collect funds from clients and make payments on their behalf, and upon the impact of foreign currency movements. Fiduciary assets, because of their nature, are generally invested in very liquid securities with a focus on preservation of principal. To minimize investment risk, we and our subsidiaries maintain cash holdings pursuant to an investment policy approved by our Board of Directors. The policy requires broad diversification of holdings across a variety of counterparties utilizing limits set by our Board of Directors, primarily based on credit rating and type of investment. Fiduciary assets included cash of$635.6 million and$583.1 million atSeptember 30, 2021 andDecember 31, 2020 , respectively, and fiduciary receivables of$1,281.0 million and$1,395.1 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. While we earn investment income on fiduciary assets held in cash and investments, the fiduciary assets may not be used for general corporate purposes. Of the$413.7 million of Cash and cash equivalents on the Consolidated Balance Sheets as ofSeptember 30, 2021 ,$134.4 million is held in fiduciary accounts representing collected revenue and is available to be transferred to operating accounts and used for general corporate purposes.
Comparison of Cash Flows for the Nine Months Ended
Cash and cash equivalents increased
Cash Flows from Operating Activities
Net cash provided by operating activities during the nine months endedSeptember 30, 2021 increased$152.1 million from the nine months endedSeptember 30, 2020 to$154.3 million . This amount represents net income reported, as adjusted for amortization and depreciation, prepaid and deferred equity compensation expense, as well as the change in commission and fees receivable, accrued compensation and other current and noncurrent assets and liabilities. Strong organic revenue growth and the All Risks Acquisition drove operating cash flow performance period-over-period. While Net income decreased$47.0 million during the nine months endedSeptember 30, 2021 , the increase in the non-cash adjustments for the amortization of intangibles and debt issuance costs, non-cash Equity compensation expense, and the timing of payments for long-term incentive plans associated with the All Risks Acquisition which, increased operating cash flows.
Cash Flows from Investing Activities
Cash flows used for investing activities during the nine months endedSeptember 30, 2021 were$345.5 million , an decrease of$508.6 million compared to the$854.1 million of cash flows used for investing activities during the nine months endedSeptember 30, 2020 . The main driver of the cash flows used for investing activities in the nine months endedSeptember 30, 2021 was the acquisition of the Preferred Blocker Entity from Onex - See Note 4, Merger and Acquisition Activity in the unaudited quarterly consolidated financial statements. The main driver of the cash flows used for investing activities in the nine months endedSeptember 30, 2020 were the All Risks Acquisition and the final remaining capital commitment on the equity method investment in aBermuda based reinsurance 64
-------------------------------------------------------------------------------- company, Geneva Re, a joint venture betweenNationwide Mutual Insurance Company andRyan Investment Holdings, LLC an entity under common control - See Note 19, Related Parties in the unaudited quarterly consolidated financial statements, in addition to other smaller acquisitions and funding of prepaid incentives of$6.2 million as compared to the repayment of prepaid incentives in the nine months endedSeptember 30, 2021 of$4.1 million .
Cash Flows from Financing Activities
Cash flows provided by financing activities during the nine months endedSeptember 30, 2021 were$293.7 million , a decrease of$720.0 million compared to cash flows provided by financing activities of$1,013.7 million during the nine months endedSeptember 30, 2020 . The main drivers of cash flows provided by financing activities during the nine months endedSeptember 30, 2021 was the issuance of Class A common stock in the IPO of$1,455.2 million , offset by the repurchase of pre-IPO LLC units and Alternative TRA payments of$780.4 million , the repurchase of Class A common stock in the IPO of$183.6 million , the repurchase of Redeemable Preferred Units from theFounder Group for$78.3 million ,$48.4 million in cash paid for the remaining 53% non-controlling common equity interest in Ryan Re,$47.0 million of cash distributions paid to pre-IPO unitholders, and$12.4 million repayment of term debt. The main drivers of cash flows provided by financing activities during the nine months endedSeptember 30, 2020 were$1,509.4 million of term loan borrowings net of repayments and a$118.9 million contribution of members' equity and preferred equity, offset by repayments net of borrowings of$428.7 million on the revolving credit facility,$70.5 million of debt issuance costs paid,$25.0 million repayment of subordinated notes,$45.0 million of equity repurchases, and$45.7 million of cash distributions to members for the nine months endedSeptember 30, 2020 .
Other Liquidity Matters
General
OnJuly 1, 2021 , in connection with but prior to the IPO, the Company repurchased 74,990,000 of Redeemable Preferred Units from theFounder Group for$78.3 million , which reflects the par value of$75.0 million plus unpaid accrued preferred dividends. OnJuly 26, 2021 , we closed our IPO through which we issued and sold 65,456,020 shares of Class A common stock at a price per share of$23.50 . We received approximately$1,449.7 million in net proceeds after deducting underwriting discounts and commissions of$76.9 million and offering expenses of$11.6 million . Upon closing of the IPO, we paid (i)$119.9 million to acquire 5,887,570 newly issued LLC Units inRSG LLC , (ii)$343.5 million to acquire the equity of an entity through which Onex held its preferred unit interest inRSG LLC (with the 260,000,000 Redeemable Preferred Units ofRSG LLC owned by the entity converted through a series of transactions to 15,387,026 LLC Units immediately thereafter), (iii)$795.7 million to acquire 35,641,682 outstanding LLC Units from certain existing holders of LLC Units at a purchase price per LLC Unit equal to$23.50 , the IPO price per share of Class A common stock in our IPO, (iv)$76.2 million to purchase an additional 3,415,097 newly issued LLC Units inRSG LLC , and (v)$114.4 million to repurchase and retire 5,122,645 shares of Class A common stock held by Onex. In turn,RSG LLC applied the balance of the net proceeds it received on account of the newly issued LLC Units to pay$72.9 million of TRA Alternative Payments arising from the Organizational Transactions. The remaining$123.2 million of net proceeds are reserved for general corporate purposes. OnAugust 10, 2021 , the Board of the Company elected to terminate the All Risks long-term incentive plans. The decision to terminate the plans will not change the value of, or entitlements to, any benefits thereunder. The benefits accruing under these plans are required to be paid within twelve months of the termination date (i.e., byAugust 10, 2022 ). These awards remain subject to the achievement of service conditions. We expect to make payments related to these long-term incentive plans of$67.3 million in Q4 2021 and$113.0 million in 2022. We believe our cash and cash equivalents (which includes proceeds from the IPO), our Credit Facilities and cash from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors including continuance of historical working capital levels and capital expenditure needs, investment in de novo offerings, and the flow of deals in our merger and acquisition program. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations, this could reduce our ability to compete successfully and harm our results of operations. Credit Facilities We expect to have sufficient financial resources to meet our business requirements in the next 12 months. Although cash from operations is expected to be sufficient to service our activities, including servicing our debt and contractual obligations, and finance capital expenditures, we have the ability to borrow under our credit facilities to accommodate any timing differences in cash flows. 65
--------------------------------------------------------------------------------
Additionally, under current market conditions, we believe that we could access capital markets to obtain debt financing for longer-term funding, if needed.
OnSeptember 1, 2020 , we entered into the Credit Agreement with leading institutions, includingJPMorgan Chase Bank, N.A ., the Administrative Agent, for term loan borrowings totaling$1,650.0 million and a revolving credit facility totaling$300.0 million , in connection with financing the All Risks Acquisition. Borrowings under our revolving credit facility are permitted to be drawn for our working capital and other general corporate financing purposes and those of certain of our subsidiaries. Borrowings under our credit agreement are unconditionally guaranteed by certain of our subsidiaries and are secured by a lien and security interest in all of our assets. See Note 9, Debt in the notes to our unaudited quarterly consolidated financial statements for further information regarding our debt arrangements.
As of
As of
InMarch 2021 , we completed a repricing of our outstanding term loan borrowings. As ofMarch 31, 2021 , the interest rate on the term loan was LIBOR, plus 3.00%, subject to a 75 basis point floor. All other terms remain substantially unchanged. As ofSeptember 30, 2021 , we were in compliance with all of the covenants under our credit agreement and there were no events of default for the nine months endedSeptember 30, 2021 . OnJuly 26, 2021 , we entered into an amendment to our credit agreement, which provided for an increase in the size of our revolving credit facility from$300.0 million to$600.0 million . Interest on the upsized revolving credit facility bears interest at LIBOR plus a margin that ranges from 2.50% to 3.00%, based on the first lien net leverage ratio defined in our credit agreement. No other significant terms under our credit agreement governing the revolving credit facility were changed in connection with such amendment.
Tax Receivable Agreement
In connection with the Organizational Transactions and IPO, the Company entered into a TRA with certain pre-IPO LLC Unitholders whereby the Company agreed to pay to such LLC Unitholders 85% of the benefits that they Company realizes from increases in the tax basis of the assets ofRSG LLC resulting from purchases or exchanges of LLC Common Units, tax amortization deductions attributable to asset acquisitions that closed prior to the IPO, and certain tax benefits attributable to payments that the Company is required to make under the TRA. The Company will retain the benefit of the remaining 15% of these cash savings. Due to the uncertainty of various factors, we cannot precisely quantify the likely tax benefits we will realize as a result of the LLC Common Unit exchanges and the resulting amounts we are likely to pay out to LLC Unitholders and Onex pursuant to the Tax Receivable Agreement; however, we estimate that such tax benefits and the related TRA payments may be substantial. Assuming no changes in the relevant tax law, and that we earn sufficient taxable income to realize all cash tax savings that are subject to the Tax Receivable Agreement, we expect future payments under the Tax Receivable Agreement relating to the purchase by the Company of LLC Common Units in connection with the IPO will be$282.5 million , in aggregate. Future payments in respect to subsequent exchanges or financings would be in addition to these amounts and are expected to be substantial. The foregoing amounts are merely estimates and the actual payments could differ materially. We expect to fund these payments using cash on hand and cash generated from operations. Contractual Obligations and Commitments Our principal commitments consist of contractual obligations in connection with investing and operating activities. In "Management's Discussion and Analysis of Financial Conditions and Results of Operations" included in our IPO Prospectus, we disclosed our total contractual obligations as ofDecember 31, 2020 . These obligations are further described within Note 8, Leases and Note 9, Debt in the notes to our unaudited consolidated financial statements. See notes to our unaudited consolidated financial statements for further description on provisions that create, increase or accelerate obligations, or other pertinent data to the extent necessary for an understanding of the timing and amount of the specified contractual obligations. Within Note 15, Employee Benefit Plans, Prepaid and Long-Term Incentives in the notes to our unaudited consolidated financial statements we discuss various Long-Term Incentive Compensation Agreements and their impact. Below we have outlined the liabilities accrued as ofSeptember 30, 2021 , the projected future expense, and the projected timing of future cash outflows associated with these arrangements. 66
-------------------------------------------------------------------------------- Long-term Incentive Compensation Agreements (in thousands) September 30, 2021 Current accrued compensation $ 4,958 Non-current liability - Total Liability $ 4,958 Projected future expense 856 Total Projected Future Cash Outflows $ 5,814 Projected Future Cash Outflows 2021 $ - 2022 5,373 2023 - 2024 - Thereafter 440 Within Note 15, Employee Benefit Plans, Prepaid and Long-Term Incentives in the notes to our unaudited consolidated financial statements we discuss the All Risks Long-Term Incentive Plans and their impact. Below we have outlined the liabilities accrued as ofSeptember 30, 2021 , the projected future expense, and the projected timing of future cash outflows associated with these arrangements. All Risks Long-Term Incentive Plan (in thousands) September 30, 2021 Current accrued compensation $ 150,551 Non-current liability - Total Liability $ 150,551 Projected future expense 29,742 Total Projected Future Cash Outflows $ 180,293 Projected Future Cash Outflows 2021 $ 67,288 2022 113,005 2023 - 2024 - Thereafter - Within Note 4, Merger and Acquisition Activity in the notes to our unaudited consolidated financial statements we discuss various contingent consideration arrangements and their impact. Below we have outlined the liabilities accrued as ofSeptember 30, 2021 , the projected future expense, and the projected timing of future cash outflows associated with these contingent consideration agreements. 67 -------------------------------------------------------------------------------- Contingent Consideration (in thousands) September 30, 2021 Current accounts payable and accrued liabilities $ 14,120 Other non-current liabilities 5,263 Total Liability $ 19,383 Projected future expense 460 Total Projected Future Cash Outflows $ 19,843 Projected Future Cash Outflows 2021 $ - 2022 14,359 2023 5,484 2024 - Thereafter - Outside of the above and routine transactions made in the ordinary course of business, there have been no material changes to the contractual obligations as disclosed in our IPO Prospectus. Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates The methods, assumptions, and estimates that we use in applying the accounting policies may require us to apply judgments regarding matters that are inherently uncertain. We consider an accounting policy to be a critical estimate if: (i) the Company must make assumptions that were uncertain when the judgment was made, and (ii) changes in the estimate assumptions or selection of a different estimate methodology, could have a significant impact on our financial position and the results that our will report in the consolidated financial statements. While we believe that the estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made. The accounting policies that we believe reflect our more significant estimates, judgments and assumptions that are most critical to understanding and evaluating our reported financial results are: revenue recognition, fair value, and goodwill and intangibles. Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in our IPO Prospectus. Additionally, the changes to our critical accounting policies and estimates disclosed in our IPO Prospectus are included in Note 2, Summary of Select Significant Accounting Policies, to our unaudited consolidated financial statements. Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2, Summary of Select Significant Accounting Policies in the notes to our unaudited consolidated financial statements.
Emerging Growth Company We qualify as an "emerging growth company" pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). For as long as we are an "emerging growth company," we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory "say-on-pay" votes on executive compensation and shareholder advisory votes on golden parachute compensation. The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public 68
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companies that are not emerging growth companies. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year following the fifth anniversary of the completion of our IPO, (ii) the last day of the fiscal year in which we have total annual gross revenue of at least$1.07 billion , (iii) the date on which we are deemed to be a large accelerated filer (this means the market value of common stock that is held by non-affiliates exceeds$700.0 million as of the end of the second quarter of that fiscal year), or (iv) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. We expect to cease to qualify as an "emerging growth company" after the completion of our 2021 fiscal year.
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